August 6 – 12, 2018 | Bitcoin Allocation, Crypto Custody & More Crypto News
3iQ Research Group consolidates the top five cryptoasset stories of interest
to investment advisors and our investors.
Department of Economic Research: Every Portfolio Should Have Bitcoin
August 9, 2018 – Two professors from the Department of Economic Research at Yale University have released a working paper titled “Risks and Returns of Cryptocurrencies”.The working paper suggests that overall, cryptocurrencies have very little correlation to a wide range of traditional asset classes such as stocks, currencies, and commodities. The professors utilized the Sharpe Ratio and determined that cryptocurrencies in model portfolios offer a significantly higher potential for returns despite volatility, all while remaining uncorrelated to traditional market movements. The study also questions the widespread theory of supply-side factors such as mining costs affecting the price of cryptocurrencies. Rather than supply-side factors influencing prices, the two professors concluded that it is mostly momentum and investor attention that drives prices.
Additionally, the professors recommend that an optimal portfolio should allocate at least 6% in bitcoin, and for those less interested, approximately 4%. Regardless of the model portfolios used in the study, the duo suggests that bitcoin exposure should at least be allocated to 1%, primarily as a diversification strategy. The working paper also suggests that the blockchain technology underpinning cryptocurrencies has a chance to affect major industries, and allocating a portion of the portfolio to cryptocurrencies should be considered.
Goldman Sachs is Considering a Crypto Custody Service
August 6, 2018 – Goldman Sachs is reportedly considering offering a crypto custody service for crypto funds in efforts to reduce risks for clients who want exposure to the digital asset class. While there is no official timeline in place yet, Goldman Sachs offering a crypto custody service may be what some institutional investors have been waiting for, as having custody operations in place may lead to other initiatives such as prime-brokerage services that could offer leverage to institutions in the future. The article also notes that other major investment banks, such as JPMorgan Chase and the Bank of New York Mellon have also explored crypto custody services.
Goldman Sachs is considering the crypto custody service due to the increasing demands they have seen from clients, and perhaps the lack of traditional market players offering the service already. While this isn’t Goldman Sachs’ first crypto initiative, the major investment bank has been warming up to crypto-related financial services and products over the past year. The leading investment bank indirectly bought a major cryptocurrency exchange, Poloniex, through their backed startup, Circle. “In response to client interest in various digital products we are exploring how best to serve them in this space,” said a spokesman for Goldman Sachs. “At this point we have not reached a conclusion on the scope of our digital asset offering.”
CRA Conducts a Study on Canadian Businesses Using Bitcoin ATMs
August 6, 2018 – The Canada Revenue Agency (CRA) has conducted a study on 20 businesses in Canada that offer cryptocurrency ATMs in efforts to determine “the perceived value it brings to businesses and their customers, and attitudes towards tax compliance in the crypto-commercial sphere”. The survey that was conducted on the businesses found that most of the bitcoin ATMs were being used by people that wanted to invest directly in the cryptocurrency. The study also indicates that while the number of businesses in Canada that use bitcoin ATMs is still small, it is still growing. Approximately 300 businesses across Canada have introduced a bitcoin ATM to their business already. Peter Aboud, the owner of Slater Street Market in Ottawa, says he installed a bitcoin ATM in his business for his customers’ convenience. “Some people were asking about bitcoin and they contacted us … and so we just decided to place it for the customers,” said Aboud. “And we’re obviously going to get something out of the deal. We get some monetary payment every month just for placing the machine. It’s not a lot but it’s something.”
Jason Beitchman, a commercial litigation lawyer at Raman Beitchman LLP, thinks that bitcoin is similar to other new technologies that need to be in-line with government regulation. “Taxis have [had] a really robust regulatory regime over decades, and Uber comes in, provides a very similar service but totally is unregulated. And the regulated entities were obviously concerned about that,” said Beitchman. “So government moves in to see how it needs to protect consumers and … to bring technologies and developments through the mainstream. And they do that through regulation.”
Illicit Activities Using Bitcoin Have Fallen Substantially
August 7, 2018 – Lilita Infante, an agent at the US Drug Enforcement Administration (DEA), has reported that the ratio of illicit to legal activities using bitcoin has fallen dramatically. Infante first started seeing bitcoin appear in her cases just 5 years ago and found that some 90% were used for potentially criminal activity. Today, she notes that illegal activity has fallen to just 10% of bitcoin transactions. Since cryptocurrencies such as bitcoin are not entirely anonymous, and not impossible to trace, determining whether they are being used for illicit activities is getting clearer. Her findings contradict the public perception of bitcoin being used mostly for illicit activities, and are for actual transactional purposes rather than just for pure price speculation.
Cryptocurrency transactions may actually be a “double-edged sword” for criminals, mostly because law enforcement officials who understand the blockchain technology behind bitcoin can use it to their advantage. Since transactions in cryptocurrencies such as bitcoin are immutable, and available to the public, there are some valuable resources that can be used by agents to track transactions and their patterns. Previously, some wallet providers and exchanges did not have Know Your Customer (KYC) and Anti Money Laundering (AML) policies, essentially allowing criminals to conduct illicit transactions without worrying about their personal information being assigned to that wallet address. Today, KYC and AML policies for wallet providers and exchanges are being established in most major jurisdictions, which allows enforcement officials to match wallet addresses and their illicit transactions.
BRI Suggests Canadian Blockchain Regulatory Improvements
August 9, 2018 – Canada’s dominant research institute of blockchain technology, the Blockchain Research Institute (BRI), has provided 6 recommendations for blockchain regulatory improvements. Don Tapscott, the co-founder and executive chairman at the BRI, believes that “good regulation is critical” in the blockchain industry. Canadian regulators who are cautious, or potentially overly-critical, may cripple the pursuit of innovation of blockchain technology in Canada. Along with Cole Diamond, the CEO of Coinsquare, and an international group of stakeholders, the BRI determined a number of key regulatory issues to address: “the lack of regulatory clarity, the obsolescence of statutes and regulations, the lack of a mechanism for meaningful dialogue between regulators and other stakeholders, and the lack of dialogue between financial service providers and blockchain entrepreneurs”.
To solve these key regulatory issues, the BRI and the stakeholders who participated provided 6 recommendations for Canada’s regulators: “form a multistakeholder action committee to move these issues forward, prepare all stakeholders and the public for self-sovereign identities and pass legislation to recognize digital identities as valid, institute a national regulator with oversight of the nascent industry rather than allow individual agencies to create their own regulations piecemeal, agree on distinctions among cryptoassets and regulate accordingly, discourage discrimination against blockchain entrepreneurs and support start-ups in the space, and encourage the formation of special interest groups to move governance issues forward across applications and domains”. The BRI believes that if blockchain innovation and technology is going to move forward in Canada, there will undoubtedly be a requirement for regulation in some form.
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